Growing optimism about the prospects of the Fed's interest rate cut in June has led to a stock market rally. In fact, the semiconductor sector has outperformed, with the Philadelphia Semiconductor index reaching a record high, gaining 23.7% this year.

Many semiconductor ETFs also touched new 52-week highs. These are Invesco PHLX Semiconductor ETF SOXQ, iShares Semiconductor ETF SOXX, VanEck Vectors Semiconductor ETF SMH, SPDR S&P Semiconductor ETF XSD and Strive U.S. Semiconductor ETF SHOC.

Inside the Surge

The Federal Reserve Chair Jerome Powell told a U.S. Senate committee that the central bank is “not far" from being confident that inflation is declining toward the 2% target, which would make rate cuts possible. The comment has bolstered investor expectations for the first rate cut in June, leading to strong risk-on trade. Traders now see a 72.7% chance of the first rate cut in June, per CME Group's FedWatch tool.

Additionally, the hottest trade – Nvidia NVDA – continued to move higher after Mizuho Securities raised the price target on the stock, highlighting a bullish outlook for AI technologies. This move not only boosted Nvidia’s shares by approximately 3.5% but also had a positive spillover effect on other key players in the semiconductor space (read: Nvidia Drives AI and Semiconductor Stocks: ETFs to Gain).

Some of the leading semiconductor companies like Broadcom AVGO, Intel INTC and Micron Technology (MU) not just benefited from Nvidia's strength but were also buoyed by their own company-specific valuation tailwinds that pushed their shares up by 3.6%, 3.7% and 4%, respectively.

Intel stood out with a potential $3.5 billion investment from the U.S. government aimed at bolstering chip production for military and intelligence use. Stifel upgraded its rating from hold to buy and raised the target price on Micron Technology from $80 to $120 per share, underscoring the company's strong position. Meanwhile, Broadcom's ascent was fueled by Mizuho's increased confidence, which was reflected in a price target hike from $1,450 to $1,550 per share. The analyst raised the price target, citing increased demand for custom AI chip designs and new Ethernet tailwinds.

Solid Outlook

Semiconductors have been the most important drivers of the overall growth in technology, given the use of chips in day-to-day life from cars, electronic gadgets to planes and weapons. Demand will continue to trend higher, given increased digitization in various corners like healthcare, transport, financial systems, defense, agriculture and retail, among others. The rapid adoption of cutting-edge technology like cloud, Internet of Things, autonomous cars, gaming, wearables, VR headsets, drones, virtual reality devices, artificial intelligence, cryptocurrencies, 5G and other advanced information technologies should continue to fuel growth (read: Semiconductor ETFs Look Well Poised Post Q4 Earnings).

Further, the introduction of expensive and new-generation chips has been leading to an enhancement in the product mix for semiconductors.